Thursday, December 8

ECB may start balance sheet rundown in second quarter, sources say


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WASHINGTON/FRANKFURT — European Central Bank policymakers discussed earlier this month a detailed timeline for running down a 3.3 trillion euro bond portfolio and envisioned the start of quantitative tightening sometime in the second quarter of 2023, sources told Reuters.

The ECB could already tweak its language on reinvestments at its October meeting and then could provide a detailed plan possibly in December but more likely in February, according to three sources who spoke on condition of anonymity.

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The central bank is sitting on 3.3 trillion euros of debt in its Asset Purchase Programme and has so far said that all cash maturing in this scheme would be reinvested for an extended period of time beyond the first interest rate hike.

But the rate hikes already have started and the benchmark rate could hit 2% by the end of the year, so reinvestments will also need to come to a close.

A seminar presentation at the central bank’s Cyprus meeting in early October saw an end to full reinvestments in the second quarter of next year, with some policymakers mentioning earlier dates and others advocating June.

An ECB spokesman declined to comment.

The debt pile would be run down by not reinvesting all the cash from maturing debt rather than outright sales and the ECB would aim to exercise widespread flexibility in how this would be done.

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Policymakers agreed that markets were tense now so there was no sense in testing investors with a premature reinvestment plan. Recent turmoil in Britain, which forced the Bank of England into the market, also spooked some policymakers and strengthened the case for caution.

Policy hawks, normally advocates of tighter policy, also appeared to be on board with this plan, the sources said, as they are prioritizing rate hikes and saw the balance sheet question as a secondary issue.

Some fear that if a reduction in the balance sheet started soon, that would serve as an argument for a slowdown in rate hikes. But they see rates as a more powerful policy channel.

No decision on this timeline has been taken and the sources said there could be changes. The discussions were in an early stage and the presentation was not a policy proposal.

The sources added that the discussion did not impact the ECB’s 1.7 trillion euro Pandemic Emergency Purchase Programme. Reinvestments in this program are set to run through 2024 and policymakers are not keen at all to make a change. (Reporting by Balazs Koranyi; Editing by Paul Simao)



financialpost.com